is a balancing act. You want to spend enough to enjoy today, while
preserving enough to take care of your needs tomorrow. If you keep
things in balance, there is no reason you should run out of money.
So what throws people off balance in retirement?
Here are five things people do that puts them
at risk of running out of money.
1. No measuring device. Imagine driving across the country
with no fuel tank gauge. How often do you stop for gas? I suppose
you'll have to guess. If you approach retirement income this way,
you can get yourself in trouble. You must have a monitoring system
This type of system measures how much you have left, your income
needs, uses a conservative rate of return based on your investing
style, and takes into account remaining life expectancy. Your
retirement income gas gauge isn't only there to tell you when to
slow down -- it can also tell you when there is room to step on the
2. No spending plan. The No.1 reason people run out of money
in retirement is they spend too much relative to the amount of
financial assets they have. Most often excess spending occurs as
parents help adult children, or because an upcoming retiree forgot
to calculate expected taxes and health care expenses in their
When you retire, make a spending plan that lays out your monthly and
annual expenditures, including money for fun. Now, add up your
guaranteed sources of income, like Social Security. The amount of
living expenses in excess of your guaranteed income must come from
your savings and investments.
Make a projection assuming you take the desired withdrawals, and see
how long the money lasts. Now, make the same projection, but assume
you spend $5,000 more or less a year. This type of scenario modeling
can show you how small changes in your spending can make the
difference between having enough or running out.
3. Invest wrong. Your investment goal in retirement is not to
maximize returns, nor, contrary to what many believe, is it to
preserve principal. What most retirees want is sustainable
lifelong income. This is not the time to go for the hot stock
tip, nor is it the time to keep all your money in certificates of
This is the time to learn about the various investment philosophies
for retirement income, and decide on the one most appropriate for
you. Here are four approaches to consider:
-- The income-only approach: You only spend the interest and
dividends that your investments generate.
-- The systematic withdrawal approach: You build a risk/return
adjusted portfolio with a target annualized rate of return of about
6 to 7 percent and you plan on taking withdrawals of about 4 percent
-- The time segmentation approach: You match investments to upcoming
cash flow needs, so your safe investments are used for spending in
the first 10 years of retirement, and your growth investments can be
left alone to accumulate for years 11 and beyond.
-- The guaranteed income approach: You use annuity products to
guarantee a lifelong income.
The secret to retirement investing success is to pick an approach
and stick with it. Flip-flopping between investment approaches is
bound to cause you harm.
4. No plan B. Life throws curveballs, and it will continue to
do so in retirement. If your plan requires you to use every asset
you have, you're at risk of running out of money. You need to
allocate some of your assets to reserves -- this means the asset is
not included in your plan as available to meet living expenses in
Reserves can be an emergency fund account, home equity, cash in the
safe, a piece of land you own, or even a valued collectible.
Hopefully you'll never need to tap into your reserves, but it may be
you'll need it for health care expenses later in life, or to help an
adult child who gets in trouble. There's no telling what might come
up that throws your original plan off track. That's why you need
assets set aside as plan B.
5. Fall for the scam. There will never be a shortage of
people trying to part you from your money. In our own family, my
great aunt had caregivers that embezzled hundreds of thousands of
dollars from her in her last year of life.
Countless times, I've watched retirees fall for scams that promised
them outstanding returns. As you age, your ability to process
complex financial decisions declines. Unfortunately, you maintain a
strong belief that you have the capacity to appropriately process
such things. This is not a good combination.
Whether it be a family member or professional, you need a trusted
advisor that you can turn to before making money decisions.
You'll want to establish this relationship in your 50s or 60s. When
faced with someone presenting you with an offer, it enables you to
avoid feeling pressured by saying, "I don't make these decisions
without consulting with my (trusted advisor name)." If it is a
legitimate offer, the person presenting it to you should be happy to
discuss it with your accountant, financial advisor, or family member
that you rely on.
If you've appropriately accounted for the five things above, your
retirement should be in good shape. If you haven't, well, it may
sound overwhelming, but the planning process helps rid you of fear
and anxiety. Once you've tackled these things, you can relax and
As always, we are available for any questions or concerns you may
have. So feel free to call or email us at 925-757-6018 or send me an
Juan Pablo Blanco, Grady Elliott and the Rest of the
Smeed Financial Team
201 Sand Creek Rd. Ste. E
Brentwood, CA 94513